A senior economist at First American CoreLogic has estimated that it would cost $858 billion to extinguish the negative equity of all underwater homeowners and give them a 5% stake in their homes.

Several analysts say one reason the Treasury Department pledged unlimited support to Fannie Mae and Freddie Mac last week is that the Obama Administration is planning to expand the Home Affordable Modification Program or HAMP to allow servicers to reduce borrowers' principal balances. Mortgage experts say borrowers who get this type of modifications are less likely to redefault. That's particularly true for borrowers with no equity or even negative equity, who have little incentive to stay in their homes.

But the price is steep.

Nearly 10.7 million borrowers, or 23% of the residential mortgage market, owed more on their mortgages at Sept. 30 than their homes were worth.

Sam Khater, a senior economist with the unit of First American Corp. of Santa Ana, Calif., has estimated that the average value of mortgage debt for homes with negative equity was $280,000 in the third quarter. The average underwater borrower owed $69,700 more on her property than it was worth.

It would take $745 billion — more than the $700 billion the Treasury is spending to bail out the banking system throught the Troubled Asset Relief Program — merely to extinguish borrowers' negative equity and give them a 100% loan-to-value ratio, Khater said.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.